Students Manuals Iqs Law c08

Debentures and Loan Capital

ICSA IQS – Corporate Law 214

CHAPTER 8 DEBENTURES AND LOAN CAPITAL Chapter Objectives After the completion of this chapter you should be able to understand amongst other things:

• the distinction between share capital and loan capital • borrowing powers of a company

• what is a debenture

• who is a debenture - holder • what is a charge?

• the different types of charges

• registration of charges

• effect of not registering registrable charges

• priorities of registered charges

DISTINCTION BETWEEN SHARE CAPITAL AND LOAN CAPITAL

1.0 The important methods by which a company may raise funds is by the issue of

share capital and by borrowing from lenders. Which is called loan capital or loan

finance. .

1.2 The basic distinction between share capital and loan capital is that a shareholder is

a member of the company, whereas a lender is an external creditor. with the



raising and maintenance of share capital. These rules do not apply to loan capital.

For example,

1.3 In considering whether to raise funds from an issue of shares or from borrowing,

the directors of a company may take into account whether the issue of further

shares will result in a dilution of their or another member's shareholding. This is

particularly important where the directors wish to prevent control of the company

passing to others.

Gearing

1.4 The extent to which the company has previously borrowed is often relevant. The

ratio of borrowed funds to issued share capital is described as the gearing of a

company. If the company has borrowed a large amount relative to its issued share

capital, it is said to be highly geared. On the other hand, if it has borrowed

relatively little compared to its issued share capital, the company is said to have a

low gearing ratio.

1.5 The optimum gearing of a company depends on several considerationslike the

nature of the industry in which the company operates is relevant, The

receptiveness of the capital market to an issue of share capital is relevant to large

companies seeking to raise large amounts, and the anticipated inflation rate or

foreign exchange rates also affect the decision whether to borrow or issue further

share capital. When a company seeks to borrow large amounts, it must be sure

that it will be able to meet the interest payments.



Taxation

1.6 The Income Tax Act 1967 confers certain advantages on the raising of loan

finance compared with the issue of share capital. The payment of interest on a

loan and other associated expenses such as procurement fees, are allowable

deductions, which reduce the taxable income of companies. Whereas dividends

paid by a company together with expenses incurred in issuing share capital are not

deductible.

BORROWING POWERS OF COMPANIES

2.1 A company only has the power to borrow if it is provided and conducted in the

manner prescribed by s 19 and the Third Schedule. It also has specific power to

issue debentures, give security for loans by charging uncalled capital and granting

floating charges over its property: para 13 of the Third Schedule. This is subject

to any restriction or prohibition contained in the company's memorandum or

articles: s 19(1)(c), which if breached may render the borrowing ultra vires.

2.2 Also, the persons acting for the company, must have the requisite authority to

borrow on behalf of the company. The power to borrow is usually conferred on

the directors: Table A, art 74.



DEBENTURES

Definition

3.1 A company may borrow funds in much the same ways as individuals. Thus a

company may borrow from a bank or other moneylenders with or without

security. An indirect method of borrowing available to both companies and

individuals is to delay payments to trade creditors. A further important method of

borrowing unique to companies is by the issue of debentures. The term

"debenture" does not have a precise legal definition. It is a document, which

acknowledges the indebtedness of the company. The debt is often secured by a

charge over the property of the company but this is not necessary. The

relationship between the company and a debenture-holder is governed by the law

of contract and if the debenture is secured, also by property law.

3.2 "Debenture" is defined broadly but not exhaustively in s 4(1) to include any

debenture stock, bonds, notes and any other securities of a corporation, whether

constituting a charge on the assets of the corporation or not. Nevertheless not

every document which acknowledges indebtedness is a debenture. The term

"debenture" implies a degree of permanence or long-term borrowing. Thus the s

4(1) definition excludes among other things, bank deposit slips, bills of exchange

and promissory notes.

Debenture stock

3.3 When a company wishes to borrow money by issuing debentures to a large

number of lenders it is inconvenient to issue individual debentures, evidencing

separate debts to many holders. The company will generally regard the total

amount of the debenture issue as a single "debenture stock". This stock is then

divided among the holders according to their entitlement. The entitlement of each



holder is evidenced by a certificate, which states her or his interest in the total

stock. An advantage to the holder of debenture stock is that it can be further

divided by transferring part and retaining the remainder.

Convertible debentures or notes

3.4 A company may issue debentures with a right attached which allows debenture

holders to convert the debentures into shares. In this way, the holders obtain the

advantages of being debenture-holders with a secure, regular return and after a

period they may exercise their right to become shareholders and thereby

participate more fully in the success of the company. This is particularly

advantageous if the market value of the shares increases significantly over their

par value. It also affords the holder a hedge against inflation.

3.5 From the company's point of view, if its future prospects are attractive, it may

find its convertible debentures marketable at a relatively low interest rate.

Holders may be prepared to accept a low interest rate in exchange for the prospect

of converting the debentures into shares with a relatively high market value. The

company may also be able to avoid having to raise funds to redeem the debentures

if the holders elect to convert them into shares.

Borrowing from the public

3.6 Under s 38(1) and (2) a company that makes an invitation or offer to the public to

take up its debentures or accepts money from the public as a deposit or loan, is

required to issue a document which acknowledges the debt within two months of

acceptance of the money. The debenture provisions contained in Pt IV Div 4,

being ss 70-83, then apply to this document.



3.7 Only a public company may invite the public to lend money to it. Private

companies must be prohibited by their memorandum or articles from issuing

debentures or accepting deposits of money from the public: s 15(1)(c) and (d).

3.8 Section 38(4) enables a company to describe the document acknowledging the

debt as a mortgage debenture only if there is included in the prospectus a

statement to the effect that the loan is secured by a first mortgage over land held

by the company. The mortgage must be duly registered or registrable at the Land

Registry being either the office of the Registrar of Titles or the Land

Administrator, and the secured loan together with other loans ranking equally,

must not exceed 60 per cent of the value of the company's interest in the land. An

independent valuation of the land must be included in the prospectus.

Appointment of trustee for debenture-holders

3.9 The debenture stock is created by a deed and is referred to in the certificates sent

to each debenture-holder. For convenience, the company usually enters into this

deed with a trustee for the debenture-holders. The trustee then holds the rights

under the debenture trust deed for the individual debenture holders. The trust

deed sets out the respective rights, powers and duties of the trustee, company and

debenture-holders. Under the deed, the trustee holds the charge or security for the

debenture-holders.

3.10 Section 74(1) requires a corporation that invites or offers the public to take

debentures, to make provision in a trust deed for the appointment of a trustee

corporation for debenture-holders. Where a trustee is required to be appointed,

the borrowing corporation cannot issue debentures until the trustee corporation

has consented to act as trustee and has been appointed: s 74(2).



Contents of trust deed

• Where a corporation invites or offers the public to take up debentures

issued by it, the trust deed must contain provisions in accordance with s

76(1).

3.11 It is also usually provided that if the borrowing corporation is in default with

respect to its obligations, the principal sum borrowed, and any unpaid interest,

becomes immediately due and payable. This may also occur on the happening of

certain other events.

3.12 These include:

• default in payment of interest;

• the borrowing corporation being wound up or having a receiver appointed;

• judgment against the company being unsatisfied; and the borrowing

corporation ceasing to carry on business.

Duties of trustee for debenture-holders

3.13 The trustee for debenture-holders is subject to the duties set out in s78(1).

3.14 The trustee must ensure that:

• the charged property of the borrowing corporation is sufficient to

discharge the principal debt when it falls due;

• the prospectus is consistent with the trust deed;

• charges are properly registered; and

• the obligations of the borrowing corporation under the trust deed are

observed.



3.15 The trustee may apply to the Minister, and if necessary to the court, where it is of

the opinion that the assets of the borrowing corporation will be insufficient to

discharge the principal debt: s 78(2) and (3).

Liability of trustee for debenture-holders

3.16 The trustee may not be given a blanket exemption from all liability under the

terms of the trust deed and such exemptions shall be void if they are not related to

a standard of care and diligence: s 83(1).

Statutory rights of debenture-holders

3.17 CA confers certain rights on the debenture-holders or their trustee. These include

the right to receive a copy of the audited financial statements of the company

together with the auditor's report. CA imposes upon the auditor of the company a

statutory duty to send these by post to the debenture-holders or their trustee: s

175(1) and (2).

Transfer of debentures

3.18 In order to encourage people to invest in debentures, companies usually waive

their common law rights and issue debentures with a provision that the debentures

are freely transferable.



COMPANY CHARGES

What is a charge?

4.1 We have seen that debentures are usually secured by a mortgage or a charge over

the borrowing company's property.

4.2 A company may give any type of security that a natural person may give. Such

security may take the form of a charge or mortgage of some sort or a pledge of

chattels. A legal mortgage is a conveyance or assignment of legal title in property

subject to an equity of redemption. An equitable mortgage is the assignment of

equitable title as security. A charge is a security interest in property that is created

by contract; it transfers neither title nor possession.

4.3 A company has the power to grant floating charges over its property: s 19(1)(c)

and para 13 of the Third Schedule, which includes the right to give security by

charging its reserve capital. This means that if a company has issued partly paid

shares, it may charge the unpaid amounts, which are subject to later calls. This

gives a lender security over the unpaid part of the issued capital of the borrowing

company.

4.4 The power to charge the company's assets or give security for a debt of the

company is usually conferred on the board of directors: Table A, art 74. A charge

does not involve the transfer of ownership of the secured property. The borrower

(chargor) retains ownership of the property subject to certain restrictions on her or

his powers to deal with that property. These restrictions are imposed so as to

protect the security of the lender (chargee).

4.5 In the context of company law, the term "charge" has a broader meaning. Section

4(1) defines a charge as including a mortgage or any agreement to give or execute

a charge or mortgage whether upon demand or otherwise. As such, a charge may



be legal or equitable and includes any security for repayment of a debt thereby

incorporating mortgages and charges in the strict legal sense. In Bensa Sdn Bhd v

Malayan Banking Bhd , the High Court held that a memorandum of deposit

relating to moneys placed in a fixed deposit was a debenture as it contained

elements of an obligation, covenant, undertaking or guarantee to pay. It was a

security granted by the company to an insurance company as collateral for the

latter to issue several performance bonds. As it had been properly registered as a

charge under s 108(3)(a) of CA, it was a secured debt.

4.6 The definition of a charge also extends to other securities such as liens and

pledges. The inclusion of the latter is of particular importance with the advent of

scripless trading of securities in Malaysia, as s 40 of the Securities Industry

(Central Depositories) Act 1991 provides that where a central depository deals

with pledges of charged securities, such securities will be transferred to a special

account known as the "Pledged Securities Account".

Fixed and floating charges

4.7 A borrowing company can grant a fixed or floating charge as security to

debenture-holders.

4.8 A fixed charge attaches to specific property owned by the borrower. This property

may or may not be owned by the company at the time the charge is created. In

fact, it need not necessarily be in existence at the time the charge is given. The

courts of equity also recognised fixed charges over future property. It would

suffice that the relevant property is ascertained or definite or capable of being

ascertained or defined in the instrument creating the charge so that there can be no

doubt that the property is caught by the charge: Malaysian International

Merchant Bankers Bhd v Highland Chocolate & Confectionery Sdn Bhd (No.2) .



4.9 Due to the nature of a fixed charge, the company is unable to dispose of the

charged assets without the lender's consent: Siebe Gorman & Co Ltd v Barclays

Bank Ltd . In the English case of Re Charge Card Services Ltd , Millett J held that

a company could create a charge in favour of a bank over an amount standing to

its with credit the bank.

4.10 Section 108(3)(k) provides that a charge over a credit balance in a deposit account

is a registrable charge.

4.11 The creation of a fixed charge on the book debts of a company was affirmed by

the Supreme Court in the case of United Malayan Banking Corporation Bhd v

Aluminex (M) Sdn Bhd .

4.12 Floating charges are charges which float above specific categories of assets such

as its inventory. The company is free to dispose of these assets in the normal

course of business and to replace them by acquiring the same category of assets in

the future. When the company is in default, and the debenture-holders intervene

to enforce the debenture or the company is wound up, the charge ceases to float

and drops down to attach itself to the specified categories of assets then owned by

the company. On default, the floating charge is said to crystallise and becomes, in

effect, a fixed charge over the assets of the company held at the time of

crystallisation or acquired afterwards.

4.13 A floating charge enables a company to dispose of its trading stock in the ordinary

course of business, while still giving the debenture holders a good security by

floating over any trading stock, which may be acquired. Similarly, a floating

charge may also be conferred over book-debts.



The distinction between fixed and floating charges

4.14 Buckley L J made the distinction between fixed and floating charges in the

English case of Evans v Rival Granite Quarries Ltd . He said:

A floating security is not a future security; it is a present security, which

presently affects all the assets of the company expressed to be included in it. On

the other hand, it is not a specific security; the holder cannot affirm that the

assets are specifically mortgaged to him. The assets are mortgaged in such a

way that the mortgagor can deal with them without the concurrence of the

mortgagee. A floating security is not a specific mortgage of the assets, plus a

licence to the mortgagor to dispose of them in the course of his business, but is

a floating mortgage applying to every item comprised in the security, but not

specifically affecting any item until some event occurs or some act on the part

of the mortgagee is done which causes it to crystallise into a fixed security.

4.15 The High Court of Australia held in United Builders Pty Ltd v Mutual Acceptance

Ltd , that whether a charge is a fixed or floating charge depends on the intention

of the parties. A charge is a floating charge if:

• it is a charge on a class of assets of a company present and future;

• that class is one that in the ordinary course of the company's business

would be changing from time to time; and

• it is contemplated that, until some future step is taken by or on behalf of

those interested in the charge, the company may carry on its business in

the ordinary way as far as concerns the particular class of assets.

4.16 It may be important to determine whether a charge is fixed or floating because

floating charges are required to be registered under s 108.



4.17 The Court of Appeal in Singapore held in the case of Dresdner Bank

Aktiengesellschaft v Ho Mun-Tuke Don , that having the last two characteristics

was sufficient for it to be a floating charge. In this case the court held letters of

hypothecation executed by a stock broking company in favour of its bankers to be

floating charges over all the assets of the company.

4.18 This was also the decision in the case of Re Bonds Ltd, where the court held that

the charge over part of the stock-in-trade given in two letters of lien deposited

with the bank as security for the overdraft facility was a floating charge. This was

because the essence of the whole transaction was that the stock might be sold and

replaced, as long as the value of the stock in hand did not fall below twice the

amount of the overdraft.

4.19 In both Re Lin Securities (Pte) and Chase Manhattan Bank NA v Wong Tui Sun ,

the Court of Appeal in Singapore has held that letters of hypothecation given as

security to various banks were held to be floating charges even though the

drafters of the instruments chose to label them by another name.

4.20 The question whether a charge created over book debts of a company amounts to

a fixed charge or floating charge depends on the facts of each individual case. In

the English case of Siebe Gorman & Co Ltd v Barclays Bank Ltd , Slade J held

that a fixed charge over the book debts had been created where the charge

instrument provided that the chargor could not charge or assign these debts and,

most significantly, had to pay the proceeds in to an account with the chargee

bank.

4.21 It is open to the chargee and chargor to provide for a fixed charge over future

book debts while they are uncollected and a floating charge on realisation: Re

New Bullas Trading Ltd .



4.22 The rule which seems to be decisive in all of the above cases is that where a

company transfers the property in its goods to another party as surety for the

payment of debts owed by the company to that person, there is a charge. If the

chargor is at liberty to deal with the charged assets, it is a floating charge and

conversely, if the chargor is not at liberty to deal with the assets charged, then it is

more likely to be a fixed charge.

Disposal in the ordinary course of business

4.23 A floating charge enables the borrowing company to deal freely with the assets

subject to the charge in the ordinary course of its business. What dealings are in

the ordinary course of business?

4.24 In Reynolds Bros (Motors) Pty Ltd v Esanda Ltd , the New South Wales Court of

Appeal held that transactions are within the ordinary course of business if they

are made for the purpose of carrying on the business. This is so even where a

particular transaction is exceptional in nature provided its purpose is to

maintain the company as a going concern. In that case Reynolds, a dealer in

agricultural equipment, entered into an agreement in 1980 with Esanda. The

agreement provided that Reynolds had possession of certain tractors as bailee

for Esanda. This enabled it to sell the tractors as Esanda's agent and earn a

commission. Reynolds also owned a number of its own tractors. In 1981

Reynolds granted the State Bank of New South Wales a floating charge over all

its assets. In 1982 Reynolds breached its agreement with Esanda when it sold

Esanda's tractors and failed to account for the proceeds. In order to reduce this

debt Reynolds transferred ownership of ten of its own tractors to Esanda. The

State Bank treated this as a breach of the terms of its floating charge and

appointed a receiver and manager who challenged the validity of the

transaction with Esanda.



4.25 The court held that the transfer of the tractors to Esanda was within Reynolds'

ordinary course of business. This was because it enabled Reynolds to maintain

itself as a going concern and meant that the tractors were not covered by the State

Bank's floating charge.

4.26 A company can in the ordinary course of its business dispose of assets subject to a

floating charge. It is also within the ordinary course of business for a company to

grant a later fixed charge over specific assets which has priority over a prior

floating charge covering that category of assets. Priorities are discussed below.

A disposal of a company's business in its entirety as a preliminary step in ceasing

business would not be in the ordinary course of business.

4.27 The principle that a company can carry its business in the ordinary way is the

reason why a landlord has the right to distrain for rent, even though the goods

seized are subject to a floating charge. As long as distress is commenced before

the charge crystallizes, a landlord may proceed to sell goods distrained even after

the charge has ceased to float. However, once the charge has crystallised a

landlord may no longer distrain upon goods that are subject to the charge:

Perbadanan Pembangunan Bandar v Syabas Holding Sdn Bhd .

Crystallisation of floating charges

4.28 At law, a floating charge crystallises when the borrowing company is wound up

or ceases to carry on business. This is because it is an implied condition that the

company continues to carry on business. Crystallisation also occurs when the

company defaults in paying interest or repaying the principal sum and the holders

of the charge intervene by appointing a receiver or applying to the court for the

appointment of a receiver.

4.29 Provision is also usually made for automatic crystallisation on certain stated

events. These include where the borrowing company:



• defaults in payment of interest for a specified period;

• breaches restrictions on future borrowings;

• allows the value of charged assets to decline below a minimum amount;

• ceases to deal with the charged assets in the ordinary course of its

business;

• ceases to carry on business;

• goes into liquidation; or

• has a receiver appointed by the court or creditor under a power contained

in a debenture.

4.30 In the case of Re Lin Securities (Pte) , the High Court of Singapore held that if the

company ceases to carry on its business, then the floating charge will

automatically crystallise. Whereas in the case of Re Panama , New Zealand and

Australian Royal Mail Co. , the Court of Appeal in England held that there will be

automatic crystallisation if a receiver was appointed by the court or creditor under

a debenture. This was followed in the case of United Malayan Banking

Corporation Bhd v Official Receiver & Liquidator of Soon Hup Seng Sdn Bhd .

4.31 Automatic crystallisation can result in commercial difficulties. A charge may

crystallise without anyone being aware of it and both the borrower and lender

may continue to act as though the charge is still floating.

4.32 In Malaysia, automatic crystallisation has been approved by Alauddin J in

Silverstone Marketing Sdn Bhd and Abdul Malik Ishak J in Malaysian

International Merchant Bankers Bhd v Highland Chocolate & Confectionery Sdn

Bhd (No.2) The relationship between the borrowing company and its lender is

essentially that of contract and accordingly the parties are free to determine their

respective rights and obligations under the same. As such, just as they may

decide on the circumstances which allows a floating charge to crystallise into a



fixed charge, they may also agree to allow a fixed charge to subsequently become

a floating charge: Re New Bullas Trading Ltd .

Priorities between floating charges and later fixed charges

4.33 Where a company grants a floating charge and later purports to grant further

charges over the same property, important questions of priority arise as between

the different holders of charges. A company which has given a floating charge

may grant a later fixed charge on assets already covered by the floating charge

because this is regarded as being within the ordinary course of the company's

business. In such a case, the later fixed charge ranks ahead of the floating charge,

as long as it was given before the floating charge crystallised. This is so, even if

the later chargee had notice of the existence of the earlier floating charge: United

Malayan Banking Corporation Bhd v Aluminex (M) Sdn Bhd and Re Hamilton's

Windsor Ironworks . This is subject to a provision preventing the creation of

later, prior-ranking charges contained in the debenture or debenture trust deed or

other instrument creating the floating charge.

4.34 Even if the debenture creating the floating charge restricts the power of the

company to grant later fixed charges, the later mortgagee may still have priority if

the mortgage is a legal mortgage as opposed to an equitable mortgage and the

later mortgagee did not have notice of the earlier floating charge and the

restriction contained in it. This rule makes it important for debenture-holders

secured by a floating charge to give notice of restrictions on future borrowings by

the company.

4.35 If the company creates a later equitable mortgage or charge, the mortgagee or

chargee may take priority over the holders of the earlier charge, if the prior

chargee has permitted the company to represent that it is free to deal with

unencumbered assets. This may occur where the company is able to retain



possession of title deeds: Re Castell & Brown Ltd . A prudent trustee for

debenture-holders or chargee consequently takes possession of title deeds over the

secured property of the company

Invalidation of charges

4.36 There are a number of provisions in CA, which invalidate charges granted by a

company. A charge created within six months of the commencement of winding

up at a time when the company was insolvent can be invalidated by the liquidator

if the charge has the effect of giving the creditor a preference, priority or

advantage over the company's other creditors: s 293. This is known as a

fraudulent preference. It should be noted that s 293 only invalidates the floating

charge and not the debt. The debt can still be proved: Re Parkes Garage

(Swadlincote) Ltd .

4.37 Section 294 deals specifically with the invalidation of floating charges. Under

that section a floating charge created within six months before the commencement

of winding up is invalid except to the amount of monies paid to the company at

the time of the creation of the charge and in consideration of the charge. The

charge will not be invalidated if the creditor proves that the company was solvent

immediately after its creation. In the case of Sabah Bank Bhd v Ho Juan & Anor ,

the High Court held that s 294 applied if a party sued under the floating charge to

recover any monies claimed thereunder.

REGISTRATION OF CHARGES

5.1 Part IV, Div 7 of CA provides for a system of registration of company charges

with the Registrar. The main purpose of these provisions is to enable a potential

creditor of the company, who proposes to lend money on security of particular



assets, to ascertain whether the company has already given a charge over those

assets. They also enable an unsecured creditor to determine the extent to which

the assets of a company have been charged, and thereby to ascertain the rights of

secured creditors who rank ahead of an unsecured creditor in priority of payment.

Further provisions also determine the priorities of registrable charges as against

each other. Persons dealing with a company are taken to have constructive notice

of the information contained in the Register of Company Charges maintained by

the Registrar: s 111.

Registrable charges

5.2 Section 108 sets out the charges (whether legal or equitable) which must be

registered. The charges required to be registered under s 108(3) constitute an

exhaustive list. A Floating charge must be registered.

5.3 Details of charges, including those which do not need to be registered under s

108(3), are required to be entered in a register of charges kept by the company: s

115(2). The company must keep the register open for inspection by creditors,

members and others. Breach of s 115 constitutes an offence by the company and

any defaulting officer. It does not, however, affect the validity of any charge not

entered in the register.

Procedure for lodgement and registration of charges

Notification of details

5.4 When a company creates a charge, it must ensure that a notice of particulars of the

charge is lodged with the Registrar: s 108(1). Together with this notice, the

company must lodge a copy of the document creating the charge, or a copy of the



debenture or the first debenture if there is a series, or a statement in writing

verifying the execution of the first debenture or document creating or evidencing

the charge: s 108(1) and (5).

5.5 The time for lodgement is within 30 days after the creation of the charge: s

108(1). A charge is created on the date of execution of the instrument of charge

and not the date when the money is actually advanced: Esberger & Son Ltd v

Capital & Counties Bank .

Extension of time for lodgement

5.6 The court may extend the time for lodgement of a charge in certain

circumstances: s 114. This application may be made either by the company or

any interested person, usually the chargee. The court may exercise its discretion

where the failure to lodge within the prescribed time was accidental, due to

inadvertence or not of a nature to prejudice the position of creditors or

shareholders. The discretion of the court may also be exercised on other grounds

where it is just and equitable to extend the time for lodgement.

5.7 The time and date of lodgement of a notice of charge together with the main

particulars, are entered in the Register of Company Charges kept by the Registrar:

s 111(1). The Registrar will issue a certificate in the manner of the Companies

Regulations Schedule 2, Form 40 which is conclusive proof that the charge is

registered.

5.8 In the English case of R v Registrar of Companies, ex p Central Bank Of India,

the Court of Appeal held that the conclusiveness of the certificate only relates to

the fact of registration. It also stated that the registration of a charge does not

validate it if it is ineffective for some reason other than non-registration. Nor are

the particulars of the charge conclusive. The certificate is conclusive only as to



the fact that a charge has been duly registered; it is not conclusive as to the

validity of the charge, its extent or the property that it covers: Re Lin Securities

(Pte) .

5.9 The registration of a charge gives constructive notice to all the world of the

existence of the charge but apparently not of its terms. In Wilson v Kelland [1910]

2 Ch 306, the company created a floating charge over its undertaking. The terms

of the charge restricted the right to create further charges. Eve J held that the

registration of the charge amounted to notice to the world that the charge existed;

however, it was not notice that there were any special restrictions on the way that

the company might deal with its property. This was adopted by the Supreme

Court in the case of United Malayan Banking Corporation Bhd v Aluminex (M)

Sdn Bhd .

5.10 The time of registration is important because it determines priorities among

different registered charges over the same property.

Priorities of registrable charges

Time for registration

5.11 The question of priority of charges arises when a company borrows from two or

more lenders and purports to give each of them security over the same property.

If the company then defaults in payment to the lenders, the question arises as to

which lender has priority in enforcing the security. Priorities as regards

competing charges are determined according to the general law. This is

illustrated by the Australian case of United Builders Pty Ltd v Mutual Acceptance

Ltd .



5.12 The holder of a registered floating charge is deemed to have consented to a

subsequently registered fixed charge gaining priority where the fixed charge was

created before the floating charge crystallises. This is so, unless there was breach

of a provision in the document creating the floating charge, which prohibited or

restricted the creation of future charges and notice of this provision was lodged

with the Registrar before the creation of the subsequent registered fixed charge:

Kay Hian & Co (Pte) v Jon Phua .

Exceptions to time of registration rule

5.13 Form 34 includes a statement as to whether or not the creation of subsequent

charges is restricted or prohibited by the floating charge. This is a negative

pledge and is discussed above. It is therefore important for holders of floating

charges to ensure that the notice is accurate and complete.

5.14 The general principles with respect to the priority of charges may be summarised

as follows:

• priorities among fixed charges are governed by the general law of

property;

• an equitable charge has no priority over a legal charge unless the former

had been created earlier and its existence known by the holder of the legal

charge: United Overseas Bank Ltd v Forward Overseas Credit Ltd ;

• registered charges generally have priority in order of the time and date

when they were entered in the Register of Company Charges: Re

Benjamin Cope & Sons Ltd . The later charge may only have higher or

equal priority over the prior charge if this is allowed by the prior charge;



• a prior-registered charge however, loses priority over a subsequently-

registered charge where the subsequently-registered charge was created

before the prior registered charge and the holder of the prior-registered

charge is proved to have had actual or constructive notice of the

subsequently registered charge at the time the prior-registered charge was

created. Therefore, if charge A is registered on 1 June and charge B is

registered on 3 June, charge A is a prior charge and as a general rule has

priority over charge B, which is a subsequent charge. However, if charge

B was created first and the chargee of A had notice of charge B when

charge A was created, charge B has priority over charge A.;

• a registered charge generally has priority over an unregistered charge

unless the unregistered charge was created first and the holder of the

registered charge can be proven to have had actual or constructive notice

at the time of the creation of the registered charge of the existence of the

unregistered charge. Therefore if charge A is registered and charge B is

unregistered, generally charge A has priority over charge B. However, if

charge B was created first and the chargee of A had notice of charge B

when charge A was created, charge B has priority over charge A; and

• unregistered charges take priority according to their time of creation.

5.15 The question arises as to the extent to which such a charge has priority over a later

charge given over the same property. A common form of borrowing by a

company is the fixing of a charge to a bank as security for an overdraft. The

amount of the overdraft may fluctuate over time. If the company then charges the

same property to another creditor, to what extent does the bank have priority over

the later chargee? The English Court of Appeal held that a subsequent floating

charge over certain assets of a company can take priority over a prior floating

charge created over the whole of the company's undertaking: Re Automatic Bottle

Makers Ltd . Thus, the crucial element is the language adopted in the charge



document with the issue to be determined being whether it restricts the right of the

company to create subsequent charges.

5.16 As a general rule, priority accorded to a charge over another charge only extends

to a present liability under that charge as at the priority time, which is taken to

mean the time and date on which the charge was entered in the Register. This

general rule is subject to several qualifications:

• where a prior-registered charge secures a prospective or future liability up

to a specified maximum amount, and that amount and the nature of the

prospective liability are specified in the lodged notice of charge, the prior-

registered charge has priority over subsequently-registered charges up to

the specified amount of the prospective liability. This is irrespective

whether the further advances are made before or after registration of the

subsequent charge or whether or not the prior chargee knew of the later

charge;

• where the lodged notice of charge does not specify the maximum amount

secured by the registered charge, together with the nature of the

prospective liability, the prior charge has priority only with respect to

further advances made by the prior chargee up to the time he first obtained

actual notice of the subsequent charge; and

• where the terms of the registered charge require the chargee to make

further advances, all such further advances will have the same priority as

the charge itself, even where the chargee had actual notice of the existence

of later charges at the time when the further advances were made.

5.17 While the rules with respect to priorities are at times complicated, the basic

principle is that a chargee will never have any higher priority than that which the



chargor himself or herself had over the property subject to the charge: United

Malayan Banking Corp Bhd v Aluminex (M) Sdn Bhd .

Effect of failure to lodge notice of charge

5.18 A charge on the property of a company is not invalid by reason only of the failure

to register the charge with the Registrar. However, as discussed above, the

system of priorities provides incentive to chargees to ensure that charges are

lodged and registered.

5.19 A further reason for chargees to ensure that their charges are lodged is provided

by s 108(1). This section provides that where a company does not lodge a notice

of charge within the prescribed period of 30 days after its creation, the charge will

be void as against the liquidator or any creditor of the company. The time limit of

30 days is subject to any extension ordered by the court under s 114. If, however,

the charge is delivered to the Registrar within 30 days and the Registrar does not

issue a certificate of registration until after the time for registration has expired,

the charge will still be valid: United Asian Bank Bhd v Kwong Yik Bank Bhd

(unreported) OS No. C 98 of 1980 (High Court).

5.20 The operation of ss 108(1) and 114 means that failure to register a charge does not

automatically render the charge void against a liquidator or any creditor of the

company. It merely exposes the chargee to that risk if winding up is subsequently

commenced or if the charge is challenged by creditors of the company: Dresdner

Bank AG v Ho Mun Tuke Don . Where the charge is void against a liquidator, the

chargee remains a creditor of the company, but without security, thereby

rendering him or her as merely an unsecured creditor of the company: s 108(2).



5.21 A charge is valid against a liquidator or creditors of the company even though the

charge is registered after the commencement of winding up as long as it is lodged

within 30 days of the creation of the charge.

Students Manuals Iqs Law c08

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